Marlboro Maker Hits Reset on $2 Billion Bet on Medicine
Philip Morris considers selling stake in a recently acquired pharmaceutical business after setbacks
Philip Morris International’s PM 0.37%increase; green up pointing triangle push into healthcare is faltering, prompting the tobacco giant to consider options such as selling a stake in its biggest pharmaceuticals unit.
In 2021, the tobacco giant agreed to acquire three pharmaceutical companies for a total of more than $2 billion as part of a plan to pivot away from cigarette sales. The deals inserted the Marlboro maker into the market for inhalers and other treatments for respiratory diseases that are linked to cigarette smoking.
Philip Morris’s struggles came into view over the summer, when the company took a $680 million charge on its wellness and healthcare business and postponed its ambitious revenue goals for the business.
Now, Philip Morris is considering the possible sale of a stake in its biggest pharmaceuticals unit, as it searches for a new partner to help it make the business work. Philip Morris acquired that business, an inhaled-medication company called Vectura Group, in a $1.24 billion deal after winning a bidding war against private-equity firm Carlyle Group.
Philip Morris has had discussions with Deutsche Bank on a range of options to try to grow its wellness and healthcare division, according to people familiar with the matter. The tobacco company said it is looking to bring on a partner to help operate and grow Vectura’s drug manufacturing outsourcing business, possibly through a sale of a majority or minority stake in that business. Other options include a licensing or royalties deal or a commercial partnership, Philip Morris said.
Philip Morris didn’t anticipate how long it would take to develop pharmaceutical products—and particularly inhaled medications, according to people who have worked in Philip Morris’s health and wellness business. The tobacco giant was hit by “that realization of what a long road pharma can be,” one of those people said.
Philip Morris remains committed to developing its healthcare business and continues to see potential in several areas, including inhalable drugs, nicotine-replacement therapies and medicinal cannabis, the company’s finance chief, Emmanuel Babeau, said on a call with analysts in July.
“Our ambition to build and monetize our product pipeline are unchanged,” he said, adding that in the early days of product development, “certain headwinds are to be expected.”
In addition to the Vectura acquisition, Philip Morris in 2021 agreed to pay more than $700 million, including the assumption of debt, to buy Fertin Pharma, a Danish maker of gums and lozenges that can be used to deliver nicotine, cannabis, vitamins or cold medicine. Philip Morris also acquired OtiTopic, a U.S.-based developer of an inhalable aspirin to prevent heart attacks, for an undisclosed sum.
Philip Morris bet it could parlay its expertise in inhalation and aerosolization into a pharmaceutical business and projected that it would generate at least $1 billion dollars in annual net revenue from health and wellness products by 2025.
But two years on, the wager has been a losing one—at least so far—demonstrating the challenges big tobacco companies face trying to diversify their operations amid declining smoking rates.
In July, Philip Morris took a $680 million charge to reflect the slumping value of its healthcare and wellness business after parts of all three business units suffered setbacks.
A clinical trial for OtiTopic’s treatment was unsuccessful, and Philip Morris said it wouldn’t submit it this year to the U.S. Food and Drug Administration. The company also said its drug manufacturing outsourcing business, which came with the acquisitions of Vectura and Fertin, had developed slower than expected and incurred rising costs.
The healthcare division’s operating losses deepened in the second quarter, while its revenue was unchanged at $76 million.
There was widespread opposition to a cigarette maker branching out into treating respiratory diseases when a much bigger part of its business remains a major contributor to those health problems.
The Vectura deal proved particularly controversial for Philip Morris. In one letter to the U.K. government, dated Sept. 16, 2021, 35 signatories including several doctors argued the deal was “not in the public interest and that it creates perverse incentives for PMI to increase harm through smoking so they might then profit again through treating smoking related diseases.”
A Philip Morris spokesman said the letter’s assertions are “flat-out ridiculous. The company is very clear about its direction and future in products that can reduce risk.”